Thursday, August 2, 2007

All too often when a seller says it’s not about the money, it’sabout the money, so it was almost a shock to to get the end of a callwith Lane Merrifield, one of the three founders of Club Penguin, andrealize he means it. Almost—because as much as he means it, Club Penguin’s deal with Disneystill comes back to money in one way or another. Money andinfrastructure to expand, money for the owners’ foundation, a sale toDisney because they didn’t want certain kinds of money. I had thechance to speak with Merrifield and Steve Wadsworth, president of theWalt Disney Internet Group late Wednesday afternoon after theannouncement that Disney was paying $350 million in cash for ClubPenguin, with the possibility of a matching earnout by the end of2009. Some highlights:

10 percent to charity: Merrifield and co-founders Dave Kryskoand Lance Priebe each stand to receive about $115 million for thetwo-year-old self-funded virtual world. 10 percent of CP’s net profitsalready go to charity, primarily through a foundation started by thethree. Merrifield confirmed that 10 percent of the amount each makesfrom the sale will go to the foundation—more than $30 million from thecash payout. He said it feels “a little weird” to talk about it: “It’ssomething we’ve done all along. We never wanted it to be seen as amarketing gimmick. ... It’s part of our DNA.”

Decision to sell:From the start, the three were determined to avoid investments from VCand private equity. As Merrifield explains, “For us, it wasn’t aboutliquidating or exit strategy.” They self funded the startup based inKelowna, British Columbia and kept it running that way as it went intoprofitability. But about six months ago they realized they had to makesome tough decisions: “do what we were doing and not expand out andrisk having our own success hurt us ... or we build up theinfrastructure ourselves and risk becoming distracted ... or we find acompany that already has the infrastructure in place.” Merrifieldcompared it to sending a kid to college—at the end of the day, do youhold on or lock them in the basement? They started talking tocompanies, keeping “conversations at a minimum” and focusing on thecompanies that from the outside had the potential. “All along Disneyheld true.”

Why Club Penguin? Wadsworth said Disney had been watching CP asa product and knew as soon as they met the team it would be a good fit:“A Iot of it already lines up the things we want to do.” Wadsworthechoed some CEO Bob Iger’s earlier comments about the move beingcomplementary to a home-grown strategy for virtual worlds that theythink is already working. Disney has been cautious about M&A.Wadsworth said the company has looked at opportunities along the waybut generally speaking things are not either not the right fit or the“value expectations are not in alignment.”

The price: Merrifield said the company “had other opportunitiesthat were on par” with Disney. He didn’t want to talk specifics butinsisted, “At the end of the day, the dollars were not really apriority and never have been.”

Rebranding: The switch to “Disney’s Club Penguin” won’t beinstant. The two said they will sort it out over time. But that’s theonly obvious change planned for the virtual world. Wadsworth saidDisney has “absolutely no intent to do anything that would change orget in the way.” Disney is already promoting the new addition with ananimated video on the front page of Disney.com, which has beentransformed into a Club Penguin world.

Building out: Wadsworth, asked about global expansion (currentlyCP is largely U.S. and Canada): “Certainly something that reallyexcites us about this.” Disney has the international presence alreadyand experience translating the Disney experience to various culturesand languages. That’s one place where CP felt stuck. Merrifield talkedof having kids in Brazil struggling because they don’t know English; hewants a CP for Brazil.